Locational pricing of an environmental input

This paper models the joint production of outputs and heterogeneous effluents for firms exogenously located along a river. We derive location-specific water quality standards that reflect the nonsymmetric impact of upstream discharge relative to that same discharge further downstream. Depending on the type of sequential firm interdependence, a water control agency may or may not be able to insure efficient input choices by decentralizing these choices to the firms. Under certain conditions we can derive site-specific price aggregates to reflect the social imputed value of a particular type effluent released at a given site. If each firm is assigned responsibility for cumulative water quality just below its drain pipe, then water quality control may be modeled as an application of nonsymmetric recursive decision making.